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Intel codifies VMware lust with $219m investment

Buys board seat to watch IPO

Secure remote control for conventional and virtual desktops

Reinforcing its status as the software darling of the moment, VMware has secured a whopping $219m investment from Intel.

Intel will pay $23 per share for close to 10 million shares in the virtualization software maker, giving it a 2.5 per cent stake in all the outstanding common stock. In addition, Intel's deep pockets have purchased a board seat at VMware. This deal comes as VMware, an EMC subsidiary, approaches an IPO (initial public offering).

To put things in context, EMC bought VMware for $635m back in Dec. of 2003. Since that time, VMware has doubled its revenue just about every year.

According to a regulatory filing, VMware pulled in $259m during its most recent quarter ending March 31. That compares to $129m in revenue during the same period last year.

The same filing revealed that VMware plans to sell 38 million shares in its IPO at a price between $23 and $25 per share and hopes to trade under the symbol VMW. At $25 per share, VMware could raise $950m. It should be noted that EMC is only selling off a 10 per cent stake in VMware via the IPO.

Intel has invested in other virtualization software makers such as SWsoft in the past. The chip maker has an obvious interest in such companies, since their software often runs on Intel-based servers. Intel has worked to include hooks for virtualization software in its processors.

Intel hasn't done friend/rival Microsoft any favors with the VMware investment. Microsoft hopes to release improved virtualization software over the next year that should help it compete against VMware - the clear market leader.

Microsoft and a number of smaller virtualization players like to argue that the technology for slicing servers into multiple compartments is still in its infancy. They hope to create stronger products and then fight VMware on more equal footing as virtualization technology really takes off.

We, however, see such optimism as wishful thinking at this point. VMware's rivals tend to work on their base products and some management bits and bobs, while VMware is in the midst of raising huge amounts of capital and building out a software arsenal that travels from the desktop to the server and well beyond the core virtualization space. You can't help but think VMware is turning into one of the core management players in the software market able to help out with things stretching from desktop software security to backing up server data.

Intel now looks set to cash in on VMware's meteoric rise. ®

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